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federal
R eser ve Ba n k
DALLAS, TEXAS
of
D allas
75222
Circular No. 82-159
December 6, 1982
DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
MONEY MARKET DEPOSIT ACCOUNT
(Final Rule)
TO ALL MEMBER BANKS
AND OTHERS CONCERNED IN THE
ELEVENTH FEDERAL RESERVE DISTRICT:
The D epository Institutions D eregulation C o m m itte e (DIDC) has released
final regulations on the new money m arket deposit account.
This accou n t is
authorized by the r e ce n tly e n a c te d Garn-St. Germ ain D epository Institutions A c t o f
1982.
A tta c h e d are copies o f the DIDC's press r e le a s e and the m aterial as
subm itted for publication in the Federal R e g is te r . Q uestions regarding the m aterial
contained in this circular should be d ir ec te d to this Bank's Legal D epartm ent,
Extension 6171.
A dditional cop ies o f this circular will be furnished upon request to the
D ep artm en t o f C om m unications, Financial and Com m unity A ffairs, Extension 6289.
Sincerely yours,
William H. W allace
First Vice President
Banks and others are encouraged to use the following incoming WATS numbers in contacting this Bank:
1-800-442-7140 (intrastate) and 1-800-527-9200 (interstate). For calls placed locally, please use 651 plus the
extension referred to above.
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
Washington, D.C. 20220
PRESS RELEASE
November 24, 1982
Regulations for the
Money Market Deposit Account
The DIDC released today the final regulations on the
new money market deposit account mandated by the GarnSt Germain Depository Institutions Act of 1982.
The new
account can be offered by Federally insured commercial
banks, savings and loan associations and mutual savings
banks beginning December 14, 1982.
The regulation and explanatory information are
attached.
Attachment
COMPTROLLER O F THE CURRENCY
FEDERAL RESERVE BOARD
FED ERA L DEPOSIT INSURANCE CORPORATION
NATIONAL CREDIT UNION ADMINISTRATION
FEDERAL HOME LOAN BANK BOARD
DEPARTMENT OF THE TREASURY
DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
12 C.F.R. Part 1204
(Docket No. D-0026)
Money Market Deposit Account
AGENCY:
Depository Institutions Deregulation Committee.
ACTION:
Final Rule.
SUMMARY:
The Depository Institutions Deregulation Committee
("Committee") has established a new deposit account as required
by the Garn-St Germain Depository Institutions Act of 1982, Pub.
L. No. 97-320 ("Garn-St Germain Act" or "Act").
This new account
will be an insured deposit account under 12 U.S.C. §§ 1726 and
1813.
The new deposit account has the following principal
characteristics:
(1) an initial deposit of no less than $2,500;
(2) an average balance requirement of no less than $2,500 where
the average balance may be computed over any period up to one
month at a depository institution's discretion; (3) no minimum
maturity requirement; (4) a requirement that depository institutions
reserve the right to require at least seven days notice prior to
withdrawal or transfer of funds; (5) no interest rate ceiling on
deposits which satisfy the initial and average balance requirements;
(6) a ceiling equal to the NOW account rate ceiling for deposits
which do not meet the average balance requirement; (7) no more
than six preauthorized, automatic or other third party transfers
per month, of which no more than three can be checks; and (8)
availability to all depositors.
EFFECTIVE DATE:
December 14, 1982.
FOR FURTHER INFORMATION CONTACT:
Alan Priest, Attorney, Office
of the Comptroller of the Currency (202/447-1880); F. Douglas
Birdzell, Counsel, and Joseph A. DiNuzzo, Attorney, Federal
Deposit Insurance Corporation (202/389-4147); Rebecca Laird,
Senior Associate General Counsel, Federal Home Loan Bank Board
(202/377-6446); Paul S. Pilecki, Senior Attorney, Board of
Governors of the Federal Reserve System (202/452-3281); or Elaine
Boutilier, Attorney-Adviser, Treasury Department (202/566-8737).
LIST OF SUBJECTS IN 12 CFR Part 1204:
Banks, banking.
SUPPLEMENTARY INFORMATION:
The Depository Institutions
Deregulation Act of 1980 (Title II of P.L. No. 96-221; 12 U.S.C.
SS 3501 et^ s e q .) ("DIDA") was enacted to provide for the orderly
phase out and ultimate elimination of the limitations on the
maximum rates of interest and dividends that may be paid on
- 2 deposit accounts by depository institutions as rapidly as economic
conditions warrant.
Under DIDA, the Committee is authorized to
phase out interest rate ceilings by any one of a number of methods
including the creation of new account categories not subject to
interest rate limitations or with interest rate ceilings set at
market rates of interest.
The DIDA was amended by section 327 of the Garn-St Germain Act.
That Act requires the Committee to "issue a regulation authorizing
a new deposit account, effective no later than [December 14,
1982]."
The Act also provides that the new account "shall be
directly equivalent to and competitive with money market mutual
funds registered with the Securities and Exchange Commission
under the
Investment Company Act of 1940." The Act further provides
that "[n]o limitation on the maximum rate or rates of interest
payable on deposit accounts shall apply to the [new] account."
Finally, the Act provides that the new account "shall not be
subject to transaction account reserves, even though no minimum
maturity is required, and even though up to three preauthorized
or automatic transfers and three transfers to third parties are
permitted monthly."
The Committee requested comments on the new account required by
the Garn-St Germain Act.
47 Fed. Reg. 46530 (October 19, 1982).
The comments are summarized below.
Comments
On October 19, 1982, the Committee published in the Federal Register
a request for comments on the new account.
The
Act requires the
Committee
to issue a regulation that authorizes the new account
effective no later than December 14, 1982.
Thus, in order to
permit the Committee to analyze the comments, and to permit adequate
time for depository institutions to be able to offer the new
account by December 14, 1982, the request for comments stated
that comments must be received by November 3, 1982.
The request
for comments listed a number of specific issues upon which comments
were solicited.
It also solicited comment on any other aspect of
the account which the public wished to address, particularly with
respect to characteristics that would make the account "directly
equivalent to and competitive with" money market funds.
The Committee received 1,227 comment letters by November 3, 1982.
An additional 233 letters were received after that date and considered
by the Committee at its public meeting on November 15, 1982.
The
commenters included 904 commercial banks and bank holding companies,
347 savings and loan associations, 67 mutual savings banks, 4
credit unions, 18 state and federal regulators, 5 money market
mutual funds and related institutions, 39 depository institution
trade associations and 76 individuals or other businesses.
- 3 A great majority of the commenters expressed strong support for
the creation of the new account under the Garn-St Germain Act
that would allow depository institutions to compete more effectively
with money market funds.
A significant number of commenters
urged the Committee not to limit the account's competitiveness
and marketability through excessive regulation of its features.
Although support for the general concept of the new competitive
account was very strong, some commenters did express serious
concerns.
For example, a number of commenters felt that federal
deposit insurance on the new account might give depository institutions
a competitive advantage over money market funds.
Similarly, at
least one commenter felt that depository institutions would have
a competitive advantage over money market funds if no restrictions
were imposed on the interest payable on the new account.
Other
commenters expressed concern that the cost to depository institutions
of shifts of funds from lower yielding deposit accounts to the
new account might weaken some depository institutions.
Most
commenters who expressed the above concerns urged the Committee
to meet those concerns through appropriate structuring of the new
account.
In addition to giving their general appraisals of the new account,
most commenters addressed the specific issues upon which the
Committee solicited comments.
The first of these issues is the
appropriate minimum initial deposit requirement (if any) regarding
the new account.
There was no general consensus on this issue.
Approximately 60 percent of the commercial bank commenters felt
that the required initial deposit should be under $5,000.
Banks
expressing this preference were divided as to whether the account
minimum should be left to each institution's discretion or established
(generally in the amount of $2,500) by the Committee.
Approximately
22 percent of the thrift institution commenters supported institu
tional discretion, over half supported a minimum less than or
equal to $3,000 (generally at the $2,500 level), and 26 percent
supported an account minimum over $3,000 (with $5,000 the most
common preference of this grou p) . There was no consensus regarding
the initial minimum balance among individuals and businesses,
trade association or money market fund related commenters.
However,
individuals and businesses most frequently cited a preference for
institutional discretion on this issue.
The most common concern cited in justifying a high minimum balance
was the cost impact of funds internally shifting out of low yielding
savings accounts into the new higher yielding account.
Those
advocating a lower minimum denomination often mentioned the need
for the account to be competitive with money market funds because
those funds typically have low minimums.
- 4 The Committee also solicited comments on a minimum maintenance
balance.
Often citing a desire for account simplicity, a majority
of all commenters (including 62 percent of the depository institu
tions and 70 percent of the trade associations) indicated that
the minimum maintenance balance should be the same as the minimum
amount required to open the account.
However, regulators, money
market funds, and individuals and other businesses tended to
support institutional discretion regarding maintenance balances.
Those commenters that supported a maintenance balance different
from any minimum initial balance often noted that money market
funds generally allow investors' balances to decline below their
initial required investment without penalty.
Comment was also specifically solicited on whether institutions
should be required to pay a lower rate on deposits which fall
below any minimum maintenance balance the Committee may impose.
Sixty five percent of the depository institution commenters and a
majority of individuals supported a mandatory lower rate on balances
below any required maintenance balance.
Many of these commenters
indicated that the cost of maintaining small accounts with trans
action features would warrant a lower interest rate.
In contrast,
a majority of regulators favored leaving the rate payable on
balances under any maintenance balance to the discretion of
depository institutions.
Those favoring this approach often
noted that money market funds do not pay a lower rate on small
accounts.
In response to the Committee's request for comment on a minimum
draft denomination requirement, a majority of commercial banks
and savings and loan associations stated that this was a matter
that should be left to a depository institution's discretion.
This view was also shared by over 40 percent of the mutual savings
banks and large majorities of regulators, trade associations and
individuals.
In contrast, money market mutual funds were in
favor of a minimum draft denomination requirement.
Those opposed
to such a requirement asserted that it would be difficult to
enforce, would be unnecessary given expected numerical limitations
on transactions, and would be noncompetitive with money market
funds because those funds are free to set any minimum denomination.
Those favoring the requirement often cited their perception that
a $500 minimum check denomination is generally required by money
market mutual funds.
Regarding the desirability of a requirement that institutions
reserve the right to require seven days (or some other time
period) notice prior to withdrawal from the account, 58 percent
of all depository institution commenters were opposed to such a
- 5 requirement.
A substantial majority of all other classes of
commenters, with the exception of money market funds and
individuals, also opposed the requirement.
However, some of
these commenters appear to have mistakenly believed that the
issue was whether depository institutions must require “
prior
notice for withdrawals.
Those who understood that the issue
involved only reserving the right to require notice most often
indicated that the requirement would be perceived by depositors
as restricting the liquidity of the account.
Some of those
commenters favoring the requirement noted that it would provide
depository institutions with a mechanism which may be needed in
extraordinary circumstances.
They noted that, given the remote
possibility of such circumstances, the right to require notice
would probably never be exercised.
Commenters were divided on the issue of whether loans to a
depositor should be permitted for the purpose of allowing the
depositor to meet any initial deposit requirement.
Regulators,
trade associations and a slight majority of commercial banks
thought such loans should be permitted, while money market funds
and 75 percent of the thrifts thought such loans should not be
permitted.
Those favoring the loans noted that money market
funds are subject to no loan restrictions and further stated that
any prohibition on loans would be difficult to enforce.
Those
opposed to the loans felt they would undermine any minimum
initial deposit requirement the Committee may adopt.
Regarding the issue of additional deposits into the account,
including sweeps from other accounts, substantial majorities of
all categories of commenters stated that no such restrictions
should be imposed.
The Committee also requested comments on the establishment of a
maximum maturity requirement on the account and on the imposition
of restrictions on the maximlum time period a depository institution
could guarantee an interest rate.
Commenters as a whole were
strongly opposed to a required maximum maturity.
However, results
were mixed regarding the issue of a maximum period for which a
rate of interest could be guaranteed.
Money market funds and
mutual savings bank trade groups unanimously favored such a
restriction and a majority of mutual savings banks shared this
view.
In contrast, a majority of commercial banks, regulators,
thrifts, trade associations and individuals preferred no
restriction.
Those favoring the restriction most frequently
mentioned a maximum rate guarantee period of seven days, but many
favoring the restriction suggested either from 7 to 30 days or 30
days or more.
Those favoring the restriction felt that, if it
were not imposed, all interest rate regulated accounts would be
effectively deregulated.
Those opposing the restriction stated
that its absence would assist asset/liability management, provide
flexibility and enhance the competitiveness of the new account.
- 6 The request for comments also included the issue of appropriate
enforcement requirements regarding any monthly numerical limits
the Committee may establish concerning transactions on the
account.
The Committee specifically requested comments*on the
desirability of monitoring accounts on an ex post basis, the
appropriate definition of month, and whether the date on which a
draft is written or the date on which it is paid by an institu
tion should control for purposes of any monthly limit on the
number of drafts.
A large majority of commenters favored
enforcement through ex post monitoring.
However, there was also
significant support for leaving the enforcement method to an
institution's discretion.
Finally, 12 percent of the commenters
favored a requirement that all drafts over a numerical limit be
dishonored.
Often citing the processing difficulties involved in
reading the date of a draft, two thirds of the commenters indicated
a preference for using the date of payment, rather than the date
a draft is written, for monitoring compliance.
However, some
commenters noted that use of the date of payment might cause
inadvertent violations of a numerical limit where payees held
checks for substantial periods prior to obtaining payment.
R o u g h l y one fourth of the c o m m e n t e r s ind i c a t e d that the
i n s t i t u t i o n sh o u l d be able to c h o o s e eit h e r the d ate on w h i c h a
dr a f t is w r i t t e n or the d ate upo n w h i c h it is paid.
W i t h regard
to the d e f i n i t i o n of m o n t h for c o m p l i a n c e p u rposes, no c o n s e n s u s
wa s reached.
A slight p l u r a l i t y of c o m m e n t e r s favo r e d a sta t e m e n t
cycle, but i n s t i t u t i o n a l d i s c r e t i o n and the c a l e n d a r m o n t h were
a l s o s t r o n g l y supported.
The Committee also requested comments on whether any restrictions
should be established regarding overdraft credit arrangements
offered in connection with the new account.
Often citing the
need for flexibility and competitiveness, a majority of depository
institutions, regulators, trade associations and individuals
opposed any restriction on overdraft arrangements.
However,
money market funds took the opposite position.
Those commenters
favoring a restriction indicated that the new account is not a
transaction account and, therefore, the accommodation of overdrafts
would be inappropriate.
The requfest for comment asked whether the Committee should allow
unlimited withdrawals by mail, telephone, messenger, or in person.
The request for comments noted in this regard that it was the
opinion of the Committee's staff that telephone transfers should
be regarded as preauthorized transfers if the transfer is to a
third person or to another deposit account of the same depositor.
Over 70 percent of the commenters favored unlimited withdrawals
of the type specified in the request for comments.
In addition,
many commenters disagreed with the staff's opinion that telephone
transfers from the new account to another account of the same
depositor should be considered as preauthorized transfers.
- 7 Regarding whether 30 days (or some other period) would be
sufficient lead time for institutions to implement operational
changes for the new account, commenters were almost evenly
divided.
Many commenters noted that the time needed would be
directly related to the degree of complexity of the Committee's
implementing regulations.
Discussion of Account Features
After carefully considering the public's comments and giving
particular attention to the Act's requirement that the new
account be directly equivalent to and competitive with money
market funds, the Committee determined the characteristics of the
new account.
These characteristics are discussed below.
Interest Rate Ceiling
Section 327 of the Act provides that "(n]o limitation on the
maximum rate or rates of interest on deposit accounts shall apply
to the account. . . . ” Based on this clear and explicit legislative
guidance, and additional corroborative legislative history, the
Committee determined to impose no limitation on the maximum rate
of interest that can be paid on deposits in the new account which
meet the minimum balance requirements discussed below.
Notably, despite the clear guidance in the Act and its legislative
history regarding interest rate ceilings, at least one commenter
suggested that the Committee should impose limits on the amount
of interest that can be paid on the new account.
The commenter
noted that a money market fund must pay a yield which reflects
the return on its portfolio minus appropriate fees.
The commenter
suggested that, given this fact, a ceilingless account would be
inconsistent with the Act's requirement that the new account be
"directly equivalent to and competitive with money market mutual
funds."
This commenter suggested that a ceiling should be imposed
whether or not the account was insured.
Whether or not the Committee has discretion to impose an interest
rate ceiling on the new account, it is clear from the language of
the Act and its legislative history that Congress plainly envisioned
that no ceiling would apply to the new account.
The Committee
finds no inconsistency or conflict between the determination not
to impose a ceiling and the requirement of the Act that the account
be directly equivalent to and competitive with money market funds.
Therefore, the Committee's decision to impose no limit on the
rate of interest that can be paid on the new account is clearly
appropriate under, and consistent with, the Act.
- 8 Minimum Balance Requirements
Although the Act does not specify a required minimum denomination,
the Conference Report (S. Rep. No. 641, 97th Cong., 2d S e s s .
(1982)) and other legislative history indicate a Congressional
intent that the minimum not exceed $5,000.
As noted earlier,
the public's comments on the account did not indicate a consensus
on the question of a required initial balance.
However, there
was considerable support for $5,000, $2,500 and no required
minimum balance.
Notably, information available to the Committee
indicates that, although not legally required to do so, 59
percent of money market funds have minimum balance requirements
of $1,000 or less and 85 percent have minimum balance requirements
of $3,000 or less.
The Committee determined to impose an initial balance requirement
on the new account of $2,500.
Depository institutions are free
to establish higher minimums if they wish.
In reaching this
determination, the Committee took into consideration, among
other things, the public comments, the above noted practices of
money market funds and the potential earnings impact on depository
institutions posed by internal shifts in their deposits from
lower yielding accounts to the higher yielding Money Market
Deposit Account.
The Committee believes that a minimum initial
deposit requirement of $2,500 will allow depository institutions
to compete effectively with money market funds without unduly
affecting their costs.
For much the same reasons as those which led to the decision to
set a minimum initial balance requirement, the Committee has
established a minimum balance requirement of $2,500 for funds
maintained in the new account.
As with the minimum initial
balance requirement, depository institutions are free to set
higher balance requirements if they wish.
In considering what
minimum balance requirement is appropriate for the new account,
the Committee considered, among other things, the fact that
money market funds typically permit shareholders to maintain
balances well below their required minimum initial balance and
still earn a market rate of interest.
However, the Committee
also considered the fact that two thirds of the commenters,
often citing the need for operational simplicity, favored a
required minimum balance that was the same as any required
minimum initial deposit.
There was not a substantial number of
commenters supporting a minimum balance lower than any initial
deposit requirement.
Given this fact, and its belief that a
$2,500 minimum balance requirement will still allow depository
institutions to compete with money market funds, the Committee
determined that the account will have a required minimum balance
of $2,500.
- 9 Averaging the Balance
In order to permit flexibility to depository institutions, the
Committee determined to allow each institution to determine
compliance with the minimum balance requirement {but not the
minimum initial balance requirement) by using an average daily
balance calculated over any computation period it chooses, such
as one day, one week or one month, provided that such a computation
period is no longer than one month.
Thus, for example, an
institution could choose to determine compliance with the minimum
balance requirement through the use of a one week computation
period.
A depositor will have met the requirement if the average
daily balance in the account during the one week computation
period is equal to or above $2,500.
In order to make the minimum balance requirement effective, the
Committee has determined that a ceiling rate of interest no
higher than the institution's NOW account ceiling rate (currently
5 1/4 percent) will be imposed on accounts which fail to meet
the $2,500 minimum balance requirement.
Institutions may pay a
lower rate if they choose.
A majority of commenters favored
such a penalty rate.
The NOW account ceiling rate will apply
for the entire computation period in which the average balance
in the account is less than $2,500.
For example, an institution
which uses an average balance computed over a seven day period
must pay a depositor a rate not in excess of the NOW account
ceiling rate for the entire seven day period if the depositor's
average daily balance during that seven day period was less
than $2,500.
Depending on the computation period chosen and
the interest crediting practices of the institution, the lower
rate may have to be imposed on an ex post basis.
A few commenters expressed concern that the requirement of a
penalty rate of interest might be in violation of the statutory
mandate that the account be ceilingless.
The Committee does
not believe this to be the case.
It notes that Congress left
it within the Committee's discretion to establish an account
with a minimum balance, which could be as high as $5,000.
The
Committee believes that Congress mandated only that no interest
rate ceiling should apply to accounts that meet any such require
ment, if established.
Therefore, the Committee believes that
it has acted within its authority, and has provided additional
flexibility to institutions, by providing for the account to
pay a penalty rate of interest on balances below the $2,500
required balance chosen by the Committee.
Maturity
Section 327 of the Garn-St Germain Act provides that the account
will not be subject to transaction account reserve requirements
"even though no minimum maturity is required." The creation of
- 10 this exception to the transaction account reserve requirements
strongly suggests that Congress intended that the Committee
establish the new account without imposing a minimum maturity.
This intent is also indicated by the requirement of section 327
that the account be "directly equivalent to and competitive with
money market mutual funds." Money market funds generally do not
establish a minimum maturity and are not required to do so by law
or regulation.
Finally, that Congress intended the account to
have no minimum maturity is supported by the Senate Report, which
states that the account "should have no minimum maturity."
S.
Rep. No. 536, 97th Cong., 2d Sess. 19 (1982).
The Committee carefully considered the above legislative language
and history regarding Congressional intent on the issue of minimum
maturity.
The Committee determined that the establishment of a
minimum maturity would be inconsistent with Congressional intent
and would not result in an account directly equivalent to and
competitive with money market funds.
Therefore, the Committee
determined to impose no minimum maturity on the account.
The Committee did determine, however, to prevent depository
institutions from effectively offering the account as a long-term
deposit.
The Committee determined to impose a maximum limitation
of one month on the length of time a depository institution may
commit itself to pay any rate of interest or commit itself to
employ any method of calculation of the rate of interest on the
new account.
The Committee also determined to prohibit an
institution from conditioning the rate of interest paid or the
method of calculation of the rate of interest paid on the new
account on the length of time a deposit is maintained, if that
length of time is longer than one month.
Accordingly, a depository
institution may not obligate itself to pay the 91-day Treasury
bill rate for a period of six months.
Nor may a depository
institution, in effect, guarantee a specified or indexed rate of
interest for over one month by agreeing to pay a rate (e. g . , 30%)
for one month on the condition that the deposit will be maintained
for over one month (e.g. , 90 days).
In establishing these limitations,
the Committee recognized that an institution does have the latitude
to establish a maturity of one month or less on the account.
In establishing the above described limitations, the Committee
noted that approximately three fifths of the commenters did not
favor a limitation on the guarantee of a rate, and over 90 percent
of the commenters preferred no limitation on the maturity of the
account.
However, the Committee also noted that money market
funds are not empowered to guarantee a rate of return on invest
ments. For this reason, and the fact that allowing depository
institutions to guarantee a rate for over one month could
effectively deregulate virtually all deposit accounts now subject,
to interest rate ceilings, the Committee established the above
described limitations.
- 11 Reservation of Notice
The Committee imposed a requirement that institutions reserve
the right to require seven days prior notice of withdrawals or
transfers from the new account.
The Committee believes that
this is not inconsistent with the previously discussed
Congressional intent that the account have no minimum maturity.
This is because the Committee did not provide that institutions
must require prior notice for transactions or withdrawals.
Rather, the Committee merely provided that institutions must
reserve the right to require such prior notice.
The Committee
determined that if an institution chooses to exercise its right
to require notice, it must apply that requirement equally to
all depositors that maintain the new account.
In establishing a reservation of notice requirement, the Committee
noted that a majority of respondents to the Committee's request
for comments did not believe that a required reservation of
notice was needed and, therefore, did not favor such a require
ment.
However, under the Investment Company Act of 1940, money
market funds may delay redemptions of shares for up to seven
days.
This is similar to the current regulatory requirement
that depository institutions reserve the right to require notice
of withdrawals from savings deposits and NOW accounts.
Such a
reservation requirement distinguishes the new account from
demand deposit accounts upon which (under current law) interest
may not be paid.
For these reasons, and to give institutions a
degree of flexibility in unusual circumstances, the Committee
established the above described reservation of notice requirement.
Based on experience with savings deposits, it is likely that
such a notice requirement will be exercised only under extreme
ci rcumstances.
Transaction Features
Section 327 of the Act provides that the new account will not
be subject to transaction account reserve requirements "even
though up to three preauthorized or automatic transfers and
three transfers to third parties are permitted monthly."
The
creation of this exception to the Federal Reserve Board's
transaction account reserve requirements strongly suggests that
Congress intended the Committee to establish the account with
at least such transaction features.
Under current industry practice, and under the rules of relevant
regulatory agencies, preauthorized and automatic transfers
include transfers of funds to a third party as well as transfers
of funds to another account of the depositor if such transfers
are effected pursuant to an agreement made in advance or an
- 12 arrangement to pay a third party or transfer funds to another
account at a predetermined time or on a fixed schedule.
For
example, a transfer made pursuant to an agreement between a
depository institution and its customer that funds would be
transferred from one account to another at a specified interval
(e.g. , the 10th, 20th and 30th of each month) or used to pay
specific or recurrent charges (e.g ., a mortgage or insurance
payment) would be a preauthorized or automatic transfer.
However
the Committee'has determined that telephone transfers made to
another account of the depositor in the same institution will
not be considered under this regulation as preauthorized or
automatic transfers.
The Act provides no guidance as to the meaning of the phrase
"transfers to third parties."
However, the A c t ’s legislative
history clearly indicates that the language was intended to
include checks.
The Committee determined that, under the new
account, third party transfers can be checks or any transfer
that could be effected by means of an automatic or preauthorized
transfer.
For the present time, the Committee decided to authorize an
account with transaction features limited to those suggested by
the Act's reference to three preauthorized or automatic transfers
and three third party transfers per month.
Given the previously
discussed definition of those terms, depository institutions
must restrict preauthorized or automatic transfers from the new
account to other accounts of the depositor or to third parties
to a maximum of six transfers per month, of which no more than
three can be checks.
However, this regulation imposes no limit
on the number of telephone transfers from the new account to
another account of the same depositor at the same depository
institution.
It is noted, however, that the question of such
unlimited telephone transfers will be reconsidered at the
Committee's next meeting.
Depository institutions are, therefore
advised that, in the future, unlimited telephone transfers from
the new account to other accounts of the same customer may not
be permitted.
In establishing the monthly numerical limits on permissible
transactions, the Committee recognized that money market funds
do not impose numerical restrictions on transactions.
However,
the Committee believes that it is appropriate to authorize the
new account at this time with the above described limited
transaction features and to consider at its next meeting
whether to offer an account with more extensive third party
payment capabilities.
The Committee notes that institutions
are free to offer the new account with more limited (or no)
transaction features if they so desire.
- 13 Although the Committee limited the number of checks under the
new account, it imposed no minimum denomination concerning
those checks.
It notes that, although money market funds commonly
impose such requirements, they are not required to do so, but
rather do so as a matter of choice. The Committee determined to
give depository institutions this same flexibility.
A majority
of the responses to the Committee's request for comments on
this issue favored giving institutions this flexibility.
For reasons similar to those outlined above concerning checks,
the Committee also imposed no minimum denomination requirement
concerning preauthorized or automatic transfers.
As with the
minimum denomination of checks, institutions are free to use
their discretion as to what minimum denomination requirements
(if any) they wish to impose concerning preauthorized or
automatic transfers.
Although, as discussed above, the Committee established limitations
on automatic and preauthorized transfers of funds in the new
account, the Committee imposed no limitations on the size or
frequency of withdrawals from the account, or transfers from
the account to other accounts of the same depositor where such
withdrawals or transfers are effected by mail, telephone, messenger,
automated teller machine or in person.
For purposes of this
regulation, a withdrawal means the receipt by a depositor of
direct payment from a depository institution of funds he has
deposited in that institution.
Additions to the Account
The Committee determined to impose no restrictions on the size
or frequency of additions to the new account, including additions
effected by sweeps from other accounts into the new account.
A
substantial majority of all commenters were opposed to such
restrictions.
Availability
to All
Depositors
The Act does not specify which persons or entities are eligible
for the new account.
However, the Senate Report indicates that
the account shall be available to all depository institution
customers.
S. Rep. No. 536, 97th Cong., 2d Sess. 19 (1982).
Other legislative history provides an equally clear indication
that this was the Congressional intent.
See 128 Cong. Rec. H8436
(daily ed. Oct. 1, 1982)(remarks of Reps. Stanton and St Germain).
Furthermore, money market mutual funds are not restricted as to
the types of entities from whom they may accept funds and the Act
states that the new account "shall be directly equivalent to and
competitive with" such funds.
Given these facts, the Committee
determined that the institutions can make the account available
to all persons and entities.
- 14 Compliance Related Provisions
The Committee adopted a number of compliance related provisions
regarding the new account.
In order to ensure compliance with
the account's minimum initial deposit and balance requirements,
the Committee prohibited loans for the purpose of meeting those
requirements.
A slight majority of commenters on this issue
favored such a prohibition.
Similarly, in order to preserve
the efficacy of the previously described numerical limits on
preauthorized or automatic transfers and checks, the Committee
provided that the rate of interest, or other fees, on an overdraft
credit arrangement on an account to which withdrawals from the
new account can be paid must not be less than those imposed on
overdraft arrangements of customers who do not have deposits in
the new account.
The Committee noted that almost two thirds of
the commenters on this issue did not favor such a provision.
However, the Committee believes that the provision is necessary
in order to discourage account arrangements which would circumvent
the numerical limit on the new account's transactional capacities.
The Committee notes that the provision relates only to fees or
other charges on an account to which withdrawals from the new
account can be paid.
It does not govern the fees that a depository
institution may wish to impose regarding overdrafts on the new
account.
The previously discussed rules adopted by the Committee regarding
the new account contain several requirements expressed in monthly
terms (e. g. , the monthly numerical restrictions on transactions,
the monthly limit on agreements to pay any interest rate, and
the permissible use of an average monthly balance for maintenance
balance purposes.)
To provide institutions with a maximum
degree of flexibility, the Committee provided that, for purposes
of compliance with its rules for the new account which are
expressed in monthly terms, an institution may use either the
calendar month or a statement cycle of at least four weeks, but
not longer than 31 days.
However, it is noted that an institution
must consistently utilize either the calender month or a particular
statement cycle.
Similarly, the Committee decided to give institutions the option
of using either the date written on a check or the date on
which a check is paid for purposes of determining compliance
with the limit of three checks per month.
It is noted, however,
that an institution must consistently adhere to the use of one
date or the other.
For example, an institution which has chosen
to utilize the date of payment method may not count one check
as of the day it was written in order to circumvent the three
checks per month limit.
- 15 Finally, the Committee adopted a requirement which provides
that institutions must either prevent transactions in excess of
the numerical limitations adopted by the Committee or adopt
procedures to monitor accounts on an ex post basis and pontact
depositors who exceed those limits on more than an occasional
basis.
For depositors who continue to violate the limits on
transactions after being contacted, institutions will be required
to either close the account or take away the account's transfer
and draft capacity.
A large majority of commenters favored
enforcement through ex post monitoring. The Committee notes in
this regard that the above described enforcement requirement
establishes only the minimum a depository institution must do
to avoid permitting transactions in excess of those allowed on
the new account.
An institution is free to impose additional
measures, such as a service charge for checks over the three
per month limit.
Effective Date
The Garn-St Germain Act requires that this regulation authorizing
the new account be effective no later than December 14, 1982.
At
its public meeting held November 15, 1982 (29 days prior to December
14), the Committee voted to authorize the account.
Later the
same day, the Committee issued a press release which announced
and described the new account.
Notably, approximately one half of the comment letters received
by the Committee indicated that 30 days would be sufficient lead
time for institutions to implement the account; the other half
felt that more lead time would be required.
Given the requirements
of the Act and the commenters' opinions regarding the account's
effective date, the Committee determined to make this regulation
effective, and thus the account available, on December 14, 1982.
In deciding to make this regulation effective on December 14,
1982, the Committee was aware that the Administrative Procedure
Act (5 U.S.C. § 553(d)) generally requires a regulation to be
published in the Federal Register at least 30 days prior to its
effective date unless the regulation is excepted from this require
ment.
The Committee determined that two exceptions in the
Administrative Procedure Act apply to this regulation.
First,
the Administrative Procedure Act excepts from the 30-day delayed
effectiveness requirement a substantive rule which "relieves a
restriction."
5 U.S.C. § 553(d)(1).
The Committee is of the
opinion that this regulation is such a rule since it will remove
numerous restrictions on depository institutions with respect to
the deposit services they may offer their customers.
The Senate
Report is replete with references to the way interest rate ceilings
and other regulatory limitations have disadvantaged depository
institutions in their ability to compete for consumer savings
with less regulated entities.
By authorizing the new account,
this regulation clearly relieves many of those restrictions.
- 16 The Administrative Procedure Act also excepts from the 30-day
delayed effectiveness requirement a rule where an agency finds
"for good cause" that the rule should be published with less than
a 30-day delayed effectiveness.
The Committee determined for
good cause that this regulation should be effective on December
14, 1982.
The Committee relied on several factors in making this
determination.
First, the Garn-St Germain Act specifically states
that the regulation is to be effective no later than 60 days
after enactment, i.e., no later than December 14, 1982.
Second,
that Act's legislative history makes it clear, not only that
the regulation is to be effective no later than December 14,
1982, but that the account is to be available to customers no
later than that date.
Third, the legislative history also indicates
that the new account is to be available no later than that date
so that depository institutions can begin to stem the outflows of
their deposits.
Finally, depository institutions have had advance
notice, including the notice supplied by the Committee's October
19, 1982, request for comments and the Committee's November 15,
1982, press release, that the regulation would be effective no
later than December 14, 1982.
The Committee considered the potential effect on small entities
of its establishment of the new deposit account, as required by
the Regulatory Flexibility Act (5 U.S.C. § 601 et seq.).
In
this regard, the Committee's action, in and of itself, imposes
no new reporting or recordkeeping requirements.
Consistent
with the Committee's statutory mandate to eliminate deposit
interest rate ceilings, its establishment of the new account
enables all depository institutions to compete more effectively
in the marketplace for short-term funds.
Depositors generally
should benefit from the Committee's action since the new instrument
provides them with another investment alternative that pays a
market rate of return.
If low-yielding deposits shift into the
new account, depository institutions may experience increased
costs as a result of this action.
However, their competitive
position vis-a-vis nondepository competitors is enhanced by
their ability to offer a competitive short-term instrument at
market rates.
The new funds attracted by the new instrument
(as well as the funds in existing accounts that might otherwise
have left the institution) can be invested at a positive spread
and may, therefore, at least partially offset the higher costs
associated with the shifting of low-yielding accounts.
Pursuant to its authority under Title II of Pub. L. No. 96-221
(94 Stat. 142; 12 U.S.C. S 3501 et seq.) to prescribe rules
governing the payment of interest and dividends on deposits and
accounts of federally insured commercial banks, savings and
loan associations, and mutual savings banks, and pursuant to
the authority granted by section 327 of the Garn-St Germain
Depository Institutions Act of 1982, Pub. L. No. 97-320 (to be
- 17 codified at 12 U.S.C. § 3503), the Committee amends Part 1204
(Interest on Deposits) by adding a new § 1204.122, effective
December 14, 1982, to read as follows:
1204.122 Money Market Deposit Account
(a) Commercial banks, mutual savings banks, and savings and
loan associations ("depository institutions") may pay interest
at any rate on a deposit account as described in this section
with an initial balance of no less than $2,500 and an average
deposit balance (as computed in paragraph (b) of this section)
of no less than $2,500.
However, for an account with an average
balance of less than $2,500, a depository institution shall not
pay interest in excess of the ceiling rate for NOW accounts (12
C.F.R. § 1204.108) for the entire computation period, as described
in paragraph (b) of this section.
(b)
The average balance for this account may be calculated on
the basis of the average daily balance over any computation
period selected by an institution, which is not longer than one
month.
(For purposes of this paragraph and paragraphs (c) and
(e) of this section, a "month" shall mean, at a depository
institution's option, either a calendar month or a statement
cycle of at least four weeks but no longer than 31 days.)
(c) A depository institution is not required to establish a
maturity on this account.
However, it may do so provided that
the maturity is no longer than one month.
Furthermore, a depository
institution may not obligate itself to pay any interest rate or
obligate itself to employ any method of calculation of an interest
rate on this account for a period longer than one month.
A
depository institution may not condition the interest rate paid
or the method of calculation of the interest rate paid upon the
period of time funds remain on deposit in this account, if that
period is longer than one month.
(d)
Depository institutions must reserve the right to require
at least seven days notice prior to withdrawal or transfer of
any funds in this account.
If such a requirement for a notice
period is imposed by a depository institution on one depositor,
it must be applied equally to all other depositors holding this
account at the same institution.
(e)
(1)
Depository institutions are not required to limit the
number of transfers of funds from this account to another account
of the same depositor, or the number of withdrawals (i.e.,
payments directly to the depositor), when such transfers or
withdrawals are made by mail, telephone, messenger, automated
teller machine or in person.
Depository institutions must
- 18 restrict all preauthorized (including automatic) transfers of
funds from this account to a maximum of six per month.
Three
of such transfers may be by check, draft or similar device
drawn by the depositor to third parties.
Telephone transfers
to third parties are regarded as preauthorized transfers.
There
is no required minimum denomination for the transfers allowed
by this section.
(2)
In order to ensure that no more than the permitted
number of transfers are made, depository institutions must
either:
(i) prevent transfers of funds in this account which are
in excess of the limits established by this paragraph,
or
(ii) adopt procedures to monitor those transfers on an ex
post basis and contact customers who exceed the limits
established by this paragraph on more than an occasional
basis.
For customers who continue to violate those
limits after being contacted by the depository institution,
the institution will be required to either close the
account or take away the account's transfer and draft
capacities.
(3)
Depository institutions, at their option, may use on
a consistent basis either the date on a check or the date it is
paid in applying the limit on checks established by this paragraph.
(4)
The rate of interest or other charges imposed on an
overdraft credit arrangement on an account to which withdrawals
from this account can be paid must be not less than those imposed
on overdrafts for customers who do not maintain this account.
(f)
Depository institutions may offer the account authorized
by this section to any depositor.
(g)
Depository institutions are not required to impose restrictions
on the number of additional deposits (including sweeps from
other accounts) into this account.
(h) A depository institution is not permitted to lend funds to
a depositor to meet the $2,500 balance requirements of this
account.
By order of the Committee, November
23, 1982.
Gordon Eastburn
Acting Executive Secretary
@FedFRASER